Understanding and completing the mortgage pre-approval process can give you a leg up on other home buyers who haven’t done their research. Potential buyers should always complete the mortgage pre-approval process before house-hunting!
Visiting open houses on the weekends is fun and exciting, but serious buyers need to start looking at homes with pre-approval from a lender first. A pre-approval is important for a few reasons. First off, it shows the buyer the maximum amount they can take out in a loan considering their current income, assets, and liabilities. Secondly, most sellers will only negotiate with buyers who have already completed the mortgage pre-approval process, since it shows the seller that the buyer is serious about finding a home and can quickly see if the buyer is qualified to buy the seller’s home. And finally, going through the pre-approval process will notify the buyer if there are any red flags with credit score, a good thing to know earlier rather than later.
This is not an exhaustive list, because everyone’s situation is different, but here are some key important items that are considered in a lender’s approval process:
1. Income and Assets
Providing proof of income documents is more than just writing down your monthly income on a line. Buyers need to provide at least 30 days of pay stubs that also show the year-to-date income on the same document. Additionally, buyers may need to provide the last two years of federal tax returns or tax transcripts. The last couple of years are automatically saved to an account when buyers file online. Next, buyers need to show at least 60 days of asset accounts. This includes checking, saving, and investment accounts. Finally, buyers need to show at least two years of W-2’s. Be prepared to show any additional forms of income such as alimony or bonuses that affect income. For monetary gifts, buyers must show a signed gift letter from the person who gifted the money. Some lenders will need to see the source of those funds from the person gifting them as well. The lender will then analyze that income to determine what your debt-to-income ratio is. Meaning, what percentage of your income is used to pay all your debts.
2. Credit Score
Lenders typically reserve the lowest interest rates for buyers who have a 740+ credit scores or higher. Buyers with a lower score than 740 may have to pay a little more in interest or can pay additional discount points to lower the rate. Most lenders require at least a 620 credit score (from all buying parties) to secure a 3.5% down payment for an FHA loan. Buyers with lower scores, like in the 500’s, will just have to put a higher percentage down when purchasing their home. This is where it’s good for buyers to see their credit scores and see if there are any red flags that bring it down. Lenders pull all three credit bureaus to get a median score. Sometimes, things are only on one report and not on the others, which may account for a difference in scores.
Most lenders will advise buyers on how to increase your score over time to get a better rate on your loan. Buyers can get a free copy annually of their credit reports at www.annualcreditreport.com, a great way to check your credit without it appearing as a credit check on your credit report. While you will have to pay a fee to get your scores, it is still a good step to take, even before starting the home buying process so there are no surprises on your reports.
3. Employment
The lender wants to see if buyers are currently employed with the company that they provided the W-2s. Lenders will typically call the buyer’s employer to verify employment and salary as part of the mortgage pre-approval process. Lenders want to be sure they are loaning to buyers with a stable work history. Buyers who changed jobs multiple times in the past 2 years, may require the lender to call previous companies to also ensure proof of employment along with previous salary. Self-employed buyers will need to provide multiple other documents to their lender. All of this is done before any pre-approval is given. The quicker you get the requested documents to your lender, the smoother the process will be. Your pre-approval is typically valid for 90 to 120 days to ensure buyers are serious about buying a home. Now, you can accurately search for your next home!
Don’t forget, once you have been approved DO NOT quit your job, DO NOT go out and charge any large purchases or open up any new credit accounts until after you have closed on your new home. Doing these things will surely jeopardize your chances of a smooth home buying experience.
Feel free to reach out to me for your pre-approval before you go searching for homes.
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